1. Field of the Invention
The present invention generally relates to the field of accounting, and more particularly to transmitting and receiving data in a network to allow real time updating of accounting information.
2. Description of the Related Art
Two types of accounting systems in use today are cash basis accounting and accrual basis accounting. Cash basis accounting records income when cash is received and records expenses when bills are paid. Accrual basis accounting records income when the income is earned and expenses when they are incurred. While both cash and accrual methods are currently in use, cash accounting is typically not considered as good a measure of performance as accrual accounting. This is because economic events do not always occur at the same time that cash is exchanged. A principal reason why large corporations do not use cash accounting is that the timing of cash receipts and disbursements does not necessarily correspond to when benefits are received or efforts are expended. Accrual accounting, however, involves more subjective measurements than cash accounting, and thus may be more difficult to implement.
The differences in these two methods can be highlighted using the following example. Assume that a business has performed the following transactions: (a) bought $100 of goods on credit; (b) sold $20 of those goods for $50 cash, (c) sold $30 of goods for $70 to a customer who charged their entire purchase, (d) received $30 in partial payment from Tuesday's charge customer, (e) made a $40 partial payment on the goods bought on credit, and finally (f) sold $30 of the goods bought on credit for $50 cash. This sequence of transactions would be reflected as follows:
CashAccuralAccomplishment50 + 30 + 50 = 13050 + 70 + 50 = 170(inflow)Effort Expended4020 + 30 + 30 = 80(outflow)
Even though accrual basis accounting is generally considered to more accurately reflect the current state of an entity, it is not always used because it may require a great deal of effort to implement and maintain. One particularly labor intensive aspect of accrual basis accounting is making the determination of when to recognize income and expenses. This process may be somewhat subjective and may vary from one business to another. To further complicate matters, companies in different countries may have to follow different accounting and tax rules regarding when a particular type of income or expense should be recognized.
Thus, a system and method for accounting that increases the efficiency of accounting systems is desired. In particular, a system and method that provides some of the benefit of accrual basis accounting while increasing efficiency is also desired.